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LEISURE LETTER (05/21/2014)

Tickers: LVS, PNK, SGMS, WYNN, HT, NCLH, SNOW

EVENTS TO WATCH

Wednesday, May 21

  • East Coast Gaming Congress

Wednesday, May 21 - Thursday May 22

  • G2E Asia - The Venetian Macao

http://www.g2easia.com/Conference/#IGaming

 

Thursday May 23

  • Codere 1Q conf call

 Thursday May 27

  • Aristocrat F1H 2014 conf call

COMPANY NEWS

LVS (WSJ) is conducting a search for a new President and Chief Operating Officer as current COO Michael Leven's contract expires at the end of this year.

Takeaway:  Mike has done an excellent job but he is 76 so we are not surprised he is considering retirement.  This is a critical new hire. Sheldon won't be around forever either

 

PNK – withdrew its application for a proposed casino near Thruway Exit 23 near Albany NY (the Capital region) as its development partner chose a Global Gaming is the proposed operator. 

Takeaway:  Better to withdraw today and receive the $1 million application deposit refund than lose the deposit.

 

SGMS – is attempting to issue $375 million of 7-year senior subordinated notes  via private placement debt to QIBs.  UOP is to repay existing 9.25% senior subordinated notes due in 2019. 

Takeaway: We are keenly watching this placement as we expect BYD to be in the market in August with a refinancing transaction.


WYNN – appointed Stephen Cootey as the company’s CFO, SVP and Treasurer, effective immediately. Cootey has served as the company’s Treasurer since February 2014, and as the company’s SVP - Finance from January 2014 to May 2014.  Prior to WYNN, Cootey was VP Corporate Finance at Las Vegas Sands. 

Takeaway: A widely telegraphed promotion.  Mr. Cootey was previously an investment banker and debt money manager. 

 

HT – holder GRS Advisors discloses 6.2% stake and intends to engage management in discussions to identify opportunities to increase HT's valuation and share price.

Takeaway: A new, more management friendly form of activism? 


NCLH – announced "Norwegian NEXT" and will spend more than $250 million through 2015 to enhance dining, drinking, entertainment and other aspects of its cruise product. 

Takeaway: You have to spend to keep up with the cutthroat competition.  It is the right decision for NCL but it's still cash out the door.

 

Prestige Cruise Holdings(Cruise News) recent commentary indicates Prestige has approved the construction of two new ships or Oceania Cruises by Fincantieri.  The new vessels will be sister ships for the Marina and the Riviera.

Takeaway: Pipeline of new ships is growing.


SNOW – announced the resignation of Juan Perez, SVP and Corporate Controller effective May 15, 2014.

Takeaway:  Yesterday, we found it very curious to read a Form 4 filing on behalf of Mr. Perez indicating he forfeited shares and without further explanation from the company until the 8K filing.  Also seems unusual given SNOW's recent IPO and Mr. Perez joining SNOW in September 2011.

INDUSTRY NEWS

GAMING      

American Gaming Association - (WSJ) Withdrew support on online gambling

AGA CEO Geoff Freeman said disagreements among casino operators over online gambling is "an issue that the association cannot lead on" so it has withdrawn from the fight.

 Takeaway:  Another blow to hopes of federal legalization of internet gambling.  Adelson is cheering somewhere (we think from Macau).

 

Massachusetts – Massachusetts Gaming Commission is delaying the Boston region casino license again.  It will now hand out the license between end of August and beginning of September to give communities enough time to finalize mitigation agreements with Wynn or Mohegan Sun.  Commission still plans to issue the Western Region license (MGM Springfield - sole bidder) on June 13.

Takeaway:  Award of license to MGM remains on track although groundbreak probably won't happen until the Repeal issue is resolved.

 

Online Gaming in California – the Pechanga and San Manuel Native American tribes are working to bring online poker legislation to the California legislature.

Takeaway: Will be a slow moving legislative process in California

MACRO

China - (WSJ) unveiled details of its plans to let private capital take part in major infrastructure projects. The reform commission listed a total of 80 such projects, covering railways, gas pipelines, telecommunications and clean energy

Takeaway: Would appear the Chinese Central is fiscally constrained.

 

China - Zhu Baoliang, head of the State Information Center's economic forecasting department, said the rising cost of borrowing is weighing on China's enterprises, especially real estate developers. Zhu called for more flexibility in the PBoC's monetary policy, including cutting the reserve-requirement ratio for banks

Takeaway:  Still waiting for the RRR cut

 

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

 


Chart of the Day: Midterm Elections As Market Catalyst

Takeaway: Simply put, politics drive policy, which in turn drive markets.

Chart of the Day: Midterm Elections As Market Catalyst - Chart of the Day

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Republican Landslide?

“The people who cast the votes don’t decide an election, the people who count them do.”

-Joseph Stalin

 

A key upcoming market and economic catalyst on the horizon is the 2014 congressional midterm elections to be held on November 4th.  Historically, we’ve provided extensive election analysis into the election. The next six months will be no different.  Simply put, politics drive policy, which in turn drive markets.

 

The most famous national election surprise was probably the 1948 Dewey versus Truman presidential race.  It is widely considered the greatest election upset in American history.  Literally every prediction, both with and without associated polls, predicted that Dewey would defeat Truman.  In fact, in late September, Gallup had Dewey with an unbelievable 17 point-lead over Truman.

 

Republican Landslide? - truman

 

Given that most pundits believed he had no chance at winning the Presidency, Truman adopted a no holds barred approach to campaigning.  He attacked Dewey at every stop and “Give’em hell Harry” was consistently yelled by his supporters from the crowd.  With this gusto, Truman was able to narrow the deficit, but he still lost all of Gallup’s post convention polls, was endorsed by a mere 9% of the nation’s newspapers, and 50 of 50 “experts” in Newsweek selected Dewey to win.

 

Many members of the mainstream media were so confident of a victory that stories were written in advance of the election that discussed the “Next President Dewey” and “The Truman Failure.”  The most famous photo of the campaign was a copy of the Chicago Tribune held by President Truman that declared, “Dewey Defeats Truman,” after Truman had actually beat Dewey by a reasonable margin of 49.6% of the popular vote versus 45.1% for Dewey.

 

Back to the Global Macro Grind...

 

As of now, we certainly are not of the mind that there is going to be a massive surprise in the midterm elections, although we did get your attention with the title we’re sure!  In fact, with the advent of more advanced and real-time polling, a massive surprise is quite unlikely.  If there is a surprise, it may well be that the Republicans may actually do better than expected. But first let’s look at how the race stands today.

 

According to the RealClearPolitics 2014 Generic Congressional Vote aggregate, the race is fairly tight.  In fact, the Democrats currently have a slight edge over Republicans with the Democrats at 43.4 in the poll versus the Republicans at 42.8, for a positive edge to the Democrats of +0.6, but effectively is a near tie. Back in late October of 2013, this poll favored the Democrats by a spread of+6.6, so Republicans have certainly narrowed the margin.

 

Interestingly, if we go back to the 2010 midterm elections, this same set of polls also showed the election basically tied at this point in time (we show this in the Chart of the Day below).  Ultimately, that election turned into a Republican landslide and the Republican Party won more Congressional seats than almost any “expert” predicted.  Even the much avowed Nate Silver got the election wrong.

 

Republican Landslide? - Chart of the Day

 

In part, what many pundits missed in 2010 was the broad disdain for Congress.  That disapproval has continued to prevail and currently the RealClearPolitics Congressional Approval Poll Aggregate shows literally the lowest approval rating for Congress in the history of political polling.  Currently, the approval rating for Congress is 13.7%.  Needless to say, polls that ask about the Direction of the Country very much mirror this with only 28% of respondents saying the country is going in the right direction.

 

The other key point that many prognosticators missed in 2010 was the Republican motivation to vote.  Poll after poll showed that Republicans felt much stronger about the election in 2010.  As a result of this elevated enthusiasm, Republicans came out in droves.  Will that happen again this year again? It may be too early to tell, but President Obama’s low approval, which is currently at an abysmal +42, is likely to motivate Republicans and not get Democrats overly excited.

 

Perhaps the most interesting recent poll related to potential outcomes is a Politico poll from Monday that looked at States and races that are actually in contention.   In this poll the current edge for Republicans is somewhat staggering. 

 

According to the poll, 41% of respondents said they would vote for Republicans, 34% said they would vote for Democrats, and 25% were undecided.  When asked specifically about Senate races, the Republican edge increased to 43%.  Further, according to this poll, approval for Obama is just 40% and almost 50% favor an outright appeal of the Affordable Care Act.  Campaigning against an unpopular brand in Obama and unpopular policy in Obama Care may make this midterm strategically easier to execute on for the Republicans.

 

Speaking of elections, perhaps the most noteworthy one internationally is the upcoming election in the Ukraine.  Currently the front runner is Petro Poroshenko, or as he is better known for his candy empire, the Chocolate King. The Chocolate King was the lone Ukrainian oligarch to join in the popular protests that led to the ousting of President Yanukovych in February, which seems to be giving him an edge with the masses. 

 

Regardless of who is ultimately victorious in the Ukrainian election, the results will be watched very closely by the international community, especially as it relates to Russian acceptance of the outcome.  Let’s just hope a relative of Josef Stalin isn’t counting the votes.

 

Our immediate-term risk ranges are now as follows (we have 12 Global Macro ranges with a TREND signal overlay in our Daily Trading Ranges product):

 

UST 10yr Yield 2.46-2.57%

RUT 1083-1112

Nikkei 132

VIX 12.13-14.18

USD 79.61-80.21

Gold 1 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research  


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

MORTGAGE DEMAND FALLS AGAIN THIS WEEK

Takeaway: This morning's MBA mortgage purchase application data shows housing demand dropped for a second week in a row in spite of falling rates.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. One word of note - the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.

 

MORTGAGE DEMAND FALLS AGAIN THIS WEEK - Compendium 052114

 

Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended May 16. The interesting takeaway is that while mortgage refinancing volume has shown a modestly positive response to falling rates (+4% w/w this week and +7% w/w in the previous week, but still down -66% year-over-year), mortgage purchase application volume continues to slide (-3% w/w this week and -1% w/w in the previous week and down -12.3% y/y). 

 

Taking a step back, we're generally more interested in the mortgage purchase volume data as it's the better leading indicator of the direction of housing's momentum, while the refi data is largely a reflection of rates on a coincident basis.

 

Our research has shown that demand leads price trends in housing by 12-18 months and, as the first chart below shows, demand recently peaked in 2Q13 and has fallen significantly since (down ~15%). Admittedly, 2Q14 is tracking up vs 1Q14 by 3.6%, but relative to the -15% decline since mid-2013 (and the positive shift in weather) this bounce remains quite minor.

 

The prevailing weakness in demand suggests that as we enter the back half of this year and the first half of 2015 we should see growing downward pressure on the rate of home price appreciation.

 

In fact, the Corelogic early read on April showed home prices decelerated to +9.2% year-over-year vs their March reading of +11.1% year-over-year. This marked one of the steepest sequential decelerations (-190 bps) in years and is a preview of the downward momentum to come over the course of 2014.

 

MORTGAGE DEMAND FALLS AGAIN THIS WEEK - Purchase   Refi YoY

 

MORTGAGE DEMAND FALLS AGAIN THIS WEEK - Purchase Index Qtrly

 

MORTGAGE DEMAND FALLS AGAIN THIS WEEK - Purchase Apps LT

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

Joshua Steiner, CFA

 

Christian B. Drake

 

 

 

 

 


Pasta or Burgers?

This note was originally published at 8am on May 07, 2014 for Hedgeye subscribers.

“Do you want a hamburger or pasta for dinner?”

- To my toddlers, 5/6/14

 

Parenting is a delicate art of subtle, positive perturbation.    

 

Many times, it’s what you don’t say that matters.   And much like investment and macro narratives, it’s very much about the #Frame-up.

 

For the non-parents, the key to coaxing positive behaviors often lies in framing up the optionality.   As it relates to the quote above, note that I didn’t say, “do you want dinner?” or “are you hungry?”.  

 

Pasta or Burgers? - spaghettibaby

 

The simple goal of exhausting, thrice daily adventures in toddler nutrition is usually to just get them to eat…something.  

 

By offering two options in the manner above you maintain the illusion of choice but, in reality, it’s the same choice.  To a fledgling mind, if not eating is not presented as a choice, it doesn’t exist as an option.

 

That little psycho-persuasive device isn’t full-proof, but it should be a staple in any multi-factor, volatility sensitive parenting model. 

 

Back to the Global Macro Grind

 

If there’s a quasi-relevant take-away from that intro perhaps it’s that the act of getting older doesn’t immunize one from the trappings of effective framing.  Indeed, lawyering and political strategy are critically dependent on that reality.

 

Q:  Would you rather invest in stocks or housing here?  

 

If you answered #Neither to that ‘framed-up’ question,  you get it.

 

Let’s stick with housing and extend this Socratic dialogue we’ve got going….

 

Q:  The Case-Shiller HPI data came out last week, the Corelogic HPI data came out yesterday, and the NAHB HMI data comes out on the 15th.  What period do those respective data releases cover?     

 

A:  NAHB data = May, Corelogic = April, Case-Shiller = February

 

Q: Which one should you care about?

 

Everyone cares about Case-Shiller right?  After all, Professor Shiller is a Nobel prize winner, the media makes a big deal about the indicator every month and analysts and pundits use it as the primary gauge of the state of housing.

 

In fact, the Case-Shiller HPI is one of the most lagging housing indicators there is.  The Index measures the change in market value of residential real estate across 20 defined MSA’s and is calculated as a three month moving average. 

 

So, last week’s release represented average home price gains over the Dec/Jan/Feb period.  In other words, while we are getting the (real-time) Corelogic Home price data for April,  Case-Shiller enlightened us as to housing’s temperature back in January.

 

The simple reality is that unless it’s central to your core coverage or positioning, and even if it is, keeping tabs on the breadth of housing metrics (we have 22 in our core model), the prevailing trends, and notable shifts on a monthly basis can be time intensive and onerous.  

 

We think we’ve solved for that onerosity with the forthcoming launch of comprehensive, but hyper-consumable, housing coverage led by Josh Steiner, our head of financials research, and myself.   More on that to come. 

 

If you’ve followed us with any consistency you’re aware that after getting explicitly bullish on housing for the better part of a year beginning in 4Q12, we turned increasingly bearish at the start of this year and elevated #HousingSlowdown to a top macro theme for 2Q14. 

 

Indeed, the reported housing data since our themes call has reflected continued deterioration and the demand data released over the last few days has offered further positive confirmation to our expectation for an intermediate term slowdown.   

 

Corelogic HPI:  Corelogic home price data released yesterday showed home prices decelerating -70bps in March to +11.1% YoY.  More notably, the preliminary April estimate reflects another, significant sequential deceleration of  -190 bps to +9.2%.  If the preliminary estimate holds it will be the slowest rate of growth since December of 2012 and the largest sequential deceleration in growth since January 2007.

 

Mortgage Purchase Applications:  After last week’s decline of -5.9%, this morning’s data showed the composite MBA Mortgage Application Index bouncing +5.3% WoW.  The Refinance Index made another new low in YoY growth, declining -1.4% sequentially to -75.2% YoY!  The Purchase Applications Index was up +8.9% WoW, but note that the bounced came off its worst growth number of the year last week and purchase demand remains down -16% YoY.

 

It’s worth repeating that the demand deceleration has been geographically pervasive and has persisted in the face of both the positive inflection in the weather and declining interest rates.

 

Pasta or Burgers? - Corelogic

 

So, the housing slowdown has already commenced – what do you do with that?

 

At the individual security level, one way we’ve played housing from the short side has been via the mortgage services.   

 

The Hedgeye Financials team added NSM to our Best Ideas list on the short side on 1/8/2014 (after being positive and long the name from 2/27/13 to 9/27/13).  It’s down -14.5% since Jan 8th.  We think there is further downside.

 

Below is a bit of an analytical teaser but it captures a few of the central tenets of our short case on the company.  If you’d like to discuss the idea further please contact sales@hedgeye.com  

  

NSM: BEST IDEA SHORT -  The core of our argument is that when you figure out what servicing a single loan is worth and you multiply that by the number of loans NSM services you arrive nowhere near a valuation consistent with where NSM shares are currently trading

 

Originations = Great Expectations. We're truly confounded by guidance vs reality in the company's originations business. The company earned 14 cents in 3Q13 originating mortgages. In the fourth quarter it lost 80 cents originating mortgages, and that's on a core basis. The company lost $131-136 million on a pre-tax basis, which we'll split the difference on and call a $133.5 million PT loss. After tax, this works out to $82.8 million. NSM identified $10 million in one-time expenses after-tax. If we add that back and divide by 90.4 million shares, we get to a loss of 80 cents (core) in the quarter from originations. Moreover, the company indicates that it has identified the opportunity  to reduce expenses in the originations business by $15 million per quarter. This works out to 10 cents per quarter. My question is a simple one. How does a business that made 14 cents in 3Q13 and lost 80 cents in 4Q13 produce $1.35 - $1.80 in FY14 earnings (that's guidance) by identifying 10 cents in quarterly expense savings?

 

#CREDIBILITY: Fool Me Once .... So, to recap, the company started 2013 (post-BofA) with a guidance midpoint of $4.02, raised that to $4.40, lowered it to $2.88 and ultimately did $2.13 (or less).

 

Now, to expeditiously bring this food and kid themed missive full-circle…..

 

Q: What do you call spaghetti in disguise?  

A:  An Impasta!

 

Our immediate-term Global Macro Risk Ranges are now as follows:

 

UST 10yr Yield 2.56-2.68%

SPX 1856-1877

RUT 1101-1143

VIX 12.91-14.72
EUR/USD 1.37-1.39

Gold 1297-1318 

 

Happy Humpday Hunting!

 

Christian B. Drake

Associate


May 21, 2014

May 21, 2014 - Slide1

 

BULLISH TRENDS

May 21, 2014 - Slide2

May 21, 2014 - Slide3

May 21, 2014 - Slide4

May 21, 2014 - Slide5

May 21, 2014 - Slide6

May 21, 2014 - Slide7 

BEARISH TRENDS

May 21, 2014 - Slide8

May 21, 2014 - Slide9

May 21, 2014 - Slide10

May 21, 2014 - Slide11


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